Facebook Inc Valuation – January 2016 Update $FB

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – November 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Facebook Inc (FB) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Facebook, Inc. is a social networking company. The Company is engaged in developing products that enables users to connect and share through mobile devices and personal computers. It offers various services focused on people, marketers and developers. It offers various platforms for people to share their opinions, ideas, photos and videos, and to engage in other activities. Its products include Facebook, Instagram, Messenger and WhatsApp. The Facebook mobile app and Website enables people to connect, share, discover and communicate with each other on mobile devices and personal computers. Its Messenger is a mobile-to-mobile messaging application available on iOS and Android phones. Instagram is a mobile application and Website that enables people to take photos or videos, and share them with friends and followers. WhatsApp Messenger is a cross-platform mobile messaging application and allows people to exchange messages on iOS, Android, BlackBerry, Windows Phone and Nokia devices.


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Downloadable PDF version of this valuation:

ModernGraham Valuation of FB – January 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $311,615,350,369 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 11.25 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 15526.67% Pass
6. Moderate PEmg Ratio PEmg < 20 78.64 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 7.16 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 11.25 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.01 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

FB value Chart January 2016

EPSmg $1.43
MG Growth Estimate 15.00%
MG Value $55.09
Opinion Overvalued
MG Value based on 3% Growth $20.75
MG Value based on 0% Growth $12.16
Market Implied Growth Rate 35.07%
Current Price $112.52
% of Intrinsic Value 204.26%

Facebook Inc qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the short history as a publicly traded company, the lack of dividends, and the high PEmg and PB ratios.  The Enterprising Investor is only initially concerned by the lack of dividends.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $0.13 in 2012 to an estimated $1.43 for 2016.  This level of demonstrated earnings growth does not support the market’s implied estimate of 35.07% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Facebook Inc (FB)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

FB Charts January 2016

Net Current Asset Value (NCAV) $5.85
Graham Number $30.32
PEmg 78.64
Current Ratio 11.25
PB Ratio 7.16
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0



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Most Recent Balance Sheet Figures

Balance Sheet Information Dec2015
Total Current Assets $21,652,000,000
Total Current Liabilities $1,925,000,000
Long-Term Debt $107,000,000
Total Assets $49,407,000,000
Intangible Assets $21,272,000,000
Total Liabilities $5,189,000,000
Shares Outstanding (Diluted Average) 2,814,000,000

Earnings Per Share History

Next Fiscal Year Estimate $2.60
Dec2015 $0.99
Dec2014 $1.10
Dec2013 $0.60
Dec2012 $0.01
Dec2011 $0.46

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $1.43
Dec2015 $0.77
Dec2014 $0.59
Dec2013 $0.29
Dec2012 $0.13
Dec2011 $0.15

Recommended Reading:

Other ModernGraham posts about the company

Facebook Inc. Analysis – August 2015 Update $FB
Facebook Stock Analysis – Quarterly Update May 2015 $FB
28 Companies in the Spotlight This Week – 2/28/15
Facebook Inc. Quarterly Valuation – February 2015 $FB
22 Companies in the Spotlight This Week – 11/29/14

Other ModernGraham posts about related companies

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Facebook Inc. Quarterly Valuation – February 2015 $FB
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Facebook Inc. Quarterly Valuation – November 2014 $FB
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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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